Sustainability Assembled
Nature-related Risks and Opportunities
Nature-related financial risks continue to be highlighted in Q2 of 2024 with an ever increasingly emphasis on the need for market participants to understand the impact of nature-related loss to impact the financial and business sectors.
In Horizons01, we outlined the important role that sustainable loan products can play in addressing biodiversity loss including, for example, through selection of KPIs in sustainability-linked loans and green loans.
The report led by the Green Finance Institute – Assessing the Materiality of Nature-Related Financial Risks for the UK – emphasises the need for early action by market participants to assess, disclose, price in and manage nature related risks and impacts. The content clearly demonstrates the potential adjustments in average loan values of sectors affected by higher levels of nature-related financial risk.
In order to address this risk, market participants are required to have a deeper and broader understanding of biodiversity risks. A proactive and intentional approach is required to risk management, the investment process and specific loan terms to allow banks and credit funds to assess the potential impact of nature-related risk on loan portfolios. An approach which is better informed and intentional has the potential to either steer capital flow away from activities that damage nature or more accurately assess and mitigate such risk. Just as importantly however, a greater understanding of nature-related risk will enable market participants to analyse nature within their own transition plans, support and engage their client base and thereby identify nature-positive opportunities and services.
We outlined in Horizons01, resources and tools which market participants can utilise to increase deepen knowledge of nature-related risk and opportunities, address nature-related risk and identify opportunities. As well as the TNFD framework and guidance, this quarter has seen more strategic collaborations and partnerships in the market resulting in much needed educational material, guidance and toolkits for finance professionals.
In this section, we highlight some of the most recent reports, materials and innovations including the tools, definitions and benchmarks in the report led by the Green Finance Institute as well as the guide for investors published by Ceres on behalf of Nature Action 100. The technical guide published by the PRI is a very useful starting for any market participant looking to put in place a biodiversity policy. For further analysis how biodiversity issues can be taken into account in loan products see Horizons01.
Assessing the Materiality of Nature-Related Financial Risks for the UK
An innovative report – Assessing the Materiality of Nature-Related Financial Risks for the UK – analyses the materiality of nature degradation on the UK’s economy and financial sector in the near and long term. The report, led by the Green Finance Institute with a technical team of leading researchers and direction from Department for Environment, Food and Rural Affairs, HM Treasury, the Taskforce on Nature-related Financial Disclosures and the UK Financial Conduct Authority has developed a number of innovative tools, definitions and benchmarks.
The UK is one of the most nature-depleted countries in the world with three-quarters of the country affected. This could reduce GDP by 12% – a loss greater than that caused by the 2008 financial crisis or the Covid-19 pandemic.
Potential adjustments in average loan values of up to -9.5% for the agriculture sector in the domestic scenario, -2.3% for electricity and utilities and around -1% for manufacturing and transport.
Nature Action 100: New guide for investors
On 26 March 2024, Ceres on behalf of Nature Action 100 published a new guide, “Exploring Nature Impacts and Dependencies: A Field Guide to Eight Key Sectors,” to support investors to engage with companies in their portfolios on nature impacts and dependencies, thereby reducing overall portfolio risk. The guide includes eight individual fact sheets (focussing on biotechnology and pharmaceuticals, chemicals, consumer goods retail, food, food and beverage retail, forestry and packaging, household and personal products, and metals and mining). Each factsheet sets out a sector overview and value chain breakdown, nature related impacts and dependencies and includes key questions for investor engagement.
Background - Nature 100 Action
Nature 100 Action: Since September 2023, 200 institutional investors (representing over $28 trillion in assets under management and advice) are engaging with companies on nature and biodiversity loss. Companies are called on to take the steps needed to protect and restore nature and ecosystems in line with the Nature Action 100 Investor Expectations of Companies.
PRI Guidance for asset owners and investment managers: Developing a biodiversity policy
On 26 March 2024, the Principles for Responsible Investment (PRI) published a Technical Guide for Asset Owners and Investment Managers - Developing a Biodiversity Policy
The guide is based on a review and analysis of PRI signatories’ biodiversity policies and sets out:
- the case for investor action on biodiversity referring to both physical and transition risks;
- guidance to support investors to integrate and build a strategic approach to biodiversity loss;
- an outline of the different policies that investors can consider;
- key issues to consider before writing a biodiversity policy;
- the key components of a biodiversity policy; and
- PRI reporting framework indicators allowing signatories to provide relevant information within the 2024 PRI Reporting Framework.
The guide refers to examples of investment managers and asset owners committed to biodiversity-related policies. The following additional guidance is also available: Developing and updating a responsible investment policy: A technical guide, PRI resources on biodiversity and An introduction to responsible investment: Biodiversity for asset owners.